Canada’s airline duopoly leaves low-cost carriers and flyers feeling shut out

MONTREAL — As a new virus wreaks havoc on the global travel industry, aviation upstarts in Canada have their radar trained on a more entrenched set of challenges.

The airline market remains a duopoly, stifling competition in a vast, sparsely populated country. Start-up cash is hard to come by. Competition watchdogs respond sluggishly. And high fees and incumbent perks at big airports work against new budget carriers.

These are the grievances of scrappy upstarts and would-be players, who say barriers to entry have caused a relative dearth of ultra-low-cost carriers (ULCCs) in Canada, resulting in higher fares.

“There’s this duopoly, and the unwritten rule is that anybody that enters is going to get shut down,” Flair Airlines CEO Jim Scott said.

“Having two major carriers tends to squeeze out anybody at the bottom.”

Flair launched commercial service in 2017, taking off in a domestic market where Air Canada and WestJet Airlines Ltd. command more than 80 per cent of traffic.

It isn’t the same in other parts of the world.

South Korea, whose 51 million people live within an area 100 times smaller than Canada, sports six low-cost airlines versus Canada’s three: Flair, Swoop and Sunwing.

Europe has more than 30 low-cost carriers, according to the International Civil Aviation Organization.

“Countries like the U.S., Japan, China have bigger domestic airline markets. Yet most of the other countries in the world are not going to have as big a reliance on air travel internally as a place like Canada,” said Richard Elliott, a competition lawyer.

Meanwhile consolidation continues at home, as shareholders at Transat AT, which owns Air Transat, approved a $720-million acquisition offer from Air Canada in August.

The Competition Bureau and other regulatory authorities are scrutinizing the deal, which would secure for Air Canada about 60 per cent of the Canadian transatlantic market and almost half of the sun destination market.

The country’s competitive landscape makes getting start-up funding all the harder. To obtain an operating licence, aviation newcomers must prove to the Canadian Transportation Agency they can cover start-up costs and three months’ worth of operating capital.

In October, Vancouver-based Canada Jetlines Ltd. announced it was postponing its planned December launch and laying off most employees after failing to secure the required financing and losing investment partners.

The setback came after seven years of fundraising and despite Ottawa lifting the foreign ownership ceiling on Canadian airlines to 49 per cent from 25 per cent in 2018.

Olen Aasen, general counsel for Canada Jetlines, said an abundance of Canadian caution and an unfamiliarity with the ultra-low-cost model has further blocked the financing runway.

The two key investors at Canada Jetlines were European charter airline SmartLynx and InHarv ULCC Growth Fund, a group formed by the investment arms of several South Korean conglomerates.

“It was easier to get their money, going halfway across the world, than it was to extract money from Canadian investors,” Aasen said. “They were shocked that there wasn’t anything like this available in Canada aside from Flair.”

Funding was easier to come by and jet fuel much cheaper a quarter-century ago when WestJet launched as a regional upstart based in Calgary.

“In a lot of cases, the credit card companies would actually pay you in advance to travel, so you could create a bit of a float and generate working capital. They don’t do that anymore,” AltaCorp Capital analyst Chris Murray said.

One constant over the past 25 years is the Competition Bureau.

“It’s pretty significant caution on the part of the regulator that makes it more challenging to get these airlines to launch,” Murray said, noting the demise of discount carrier Jetsgo Corp. in 2005, less than three years after it took off.

In 2018, the Competition Bureau launched an ongoing predatory pricing investigation into WestJet and its low-cost subsidiary Swoop, which began flying earlier that year, over allegations the two carriers used anti-competitive practices to crowd out Flair from at least three routes.

More than 16 months on, Canada Jetlines’ banner photo on its home page showcases a skydiver in free fall clutching a sign reading: “Do your job, Competition Bureau.” An accompanying video features CEO Javier Suarez plummeting through the air as adrenaline junkies brandish posters proclaiming, “Canada needs more airlines” and “End sky-high airfares.”

The Competition Bureau declined to forecast an end date to the probe into WestJet and Swoop, “although the bureau endeavours to complete its investigations as expeditiously as possible.”

“We take all allegations of anti-competitive conduct seriously and we must conduct a thorough and complete examination of the facts of a case before deciding whether to challenge any alleged conduct,” spokesman Jayme Albert said in an email.

Airport costs and incumbency policies are another issue.

“We’re one of the highest-cost aviation jurisdictions, in terms of the airport fees and other levies, and that also makes it a challenge in terms of keeping your cost line down,” said Robert Kokonis, president of Toronto-based consulting firm AirTrav Inc.

A relative lack of convenient secondary airports, like those in Hamilton, Ont., and Abbotsford, B.C., can force smaller airlines to bid for higher-cost slots at Pearson and Trudeau airports in Toronto and Montreal.

Pearson stands out from most other global hubs in that it has no independent slot co-ordinator to juggle airlines’ competing flight schedules, which exposes the airport authority to favouritism, complacency or inefficient placements, said David Huttner, a commercial aviation expert who has worked with Flair.

in the meantime, outside problems continue to throw a wrench in the turbine.

Aside from cancelled flights and quarantines prompted by the novel coronavirus outbreak, the year-long grounding of the Boeing 737 Max jet has triggered hundreds of thousands of cancelled flights across the globe and created pressure on all after-market aircraft availability, said Dean McKenzie, a spokesman for charter airline Enerjet.

The prospective newcomer hopes to graduate from a charter airline to an ultra-low-cost carrier this year, having secured funding from private equity firms including Phoenix-based Indigo Partners and Toronto-based Torquest Partners.

Meanwhile, structural issues persist despite the higher foreign ownership cap, said Huttner.

“The question is, should we foster an environment that allows new entrant carriers to thrive if they can make a go of it against incumbents with deep pockets?”

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